Crypto Loan Terms to Know
Crypto Loan Terms and Definitions
Securing the best available crypto loan is easier when you understand the relevant terms and information. You'll be more than ready to begin your research after learning the essential crypto loan terms and definitions below.
Loan-To-Value Ratio (LTV)
Term used by crypto loan platforms to determine the amount of crypto asset collateral required for a user to be issued a loan. Example: A customer is looking to secure a $50,000 loan using their Bitcoin as collateral. Assuming an LTV ratio of 50% with the price of one Bitcoin being $10,000 then the calculation would be as follows: The customer would need approximately 10 BTC ($100,000 worth of BTC) to secure a $50,000 loan with an initial 50% LTV ratio.
"Know Your Customer". Centralized companies offering crypto-to-fiat loans must comply with standard financial regulations that require customers to be identified.
"Anti-Money Laundering". A formation of laws created by regulators in order to prevent illegally sourced funds from being claimed as legitimate income. As a regulatory standard, crypto loan platforms offering crypto-to-fiat loans will require AML checks prior to issuing any loan involving fiat.
A third party entity responsible for maintaining, securing, and storing crypto assets on behalf of a crypto loan platform company. Reputable custodians are insured and regulated.
"Annual Percentage Rate". An agreed upon interest rate that a user will pay to the crypto loan platform in exchange for the loan.
An asset that a crypto loan platform is willing to accept as security for repayment of a loan. Collateral is forfeited In the event that the borrower is unable to repay the loan.
Charged by some crypto loan platforms in the event that the LTV (Loan-To-Value) ratio on a user’s loan has reached the collateral liquidation threshold.
Also known as peer-to-peer loan, is the loaning of money from individuals or businesses without a middleman.
Some crypto loan platforms have integrated a native network utility token into their business model. This utility token usually provides users with discounted interest rates or other benefits related to their loan.
Crypto Backed Loan
Type of loan in which crypto assets are used as collateral.
Type of loan in which a user provides crypto assets as collateral and receives crypto assets as a loan. Example: A user deposits Ethereum into a Compound smart contract as collateral. Compound’s smart contract then issues a loan in the form of DAI to the users ERC20 compatible address.
Type of loan in which a user provides crypto assets as collateral and receives fiat as a loan. Example: A user creates an account at Blockfi and deposits their Bitcoin as collateral. Blockfi then issues a loan in the form of fiat to the users bank account.
Warning issued by a crypto loan platform to a user occuring when the value of the user’s collateral has dropped to a range approaching a risk of a liquidation event.
Some crypto loan platforms charge an upfront fee for processing a new loan request - usually for crypto-to-fiat loans.
A set of automated instructions executed by a protocol (computer program), that does not require a third party. Crypto loan platforms utilize Ethereum based smart contracts to verify, automate, and execute loan preconditions.